I N T E R N A T I O N A L
CREATING VALUE WITH EVERY TRADE
CREATING VALUE THROUGH CORPORATE TRADE UNDER IFRS
The concept that business strategies should be judged by
the economic value they create is commonly accepted
in the business community. Companies often, in the
ordinary course of business, produce some amount of
excess inventory, capital goods or real estate as technology
advances, supply outpaces demand or changes in the
business environment occur. These excesses, overstocks or
underutilized assets are also referred to as “underperforming
assets” and represent a substantial corporate value
opportunity that is often times suboptimized. Corporate
trade is a strategy to create value typically in the form of
cash savings or incremental business. Amazingly, while
corporate trade creates substantial economic benefits, it is
often misunderstood and consequently overlooked.
In evaluating the productivity of assets, some companies
may dispose of their underperforming assets through
liquidation and realize 30-40% of the assets’ original value,
while other companies today are utilizing corporate trade
strategy to realize a much greater economic value of the
assets traded. The potential realization of an extra 60%-70%
of value is substantial.
How Does Corporate Trade Work?
A corporate strategy involves selling the assets at typically
2-3 times greater than their current fair market value to a
corporate trading company such as Active International
(“Active”). Active purchases these assets using its currency
known as trade credits. Trade credits coupled with cash
(rather than 100% cash) are then used by the selling company
to purchase media, retail marketing, printing, travel or
other goods and services through Active at the equivalent
independently determined cash amounts that would have
otherwise been spent. Thus, corporate trade creates value
through cash savings. Certain companies have also applied
a similar strategy utilizing excess manufacturing capacity
to produce products for corporate trade which can be
distributed outside their normal distribution channels. This
corporate trade strategy creates incremental business and,
at the same time, creates economic benefit as the trade
credits are utilized.
In the case of media, Active operates in the same capacity as
the media-buying department of an advertising agency. The
price of the media or other goods and services purchased
through Active is benchmarked or matched to what the
selling company would have paid, except that when such
services are purchased through Active, the services are paid
for with a combination of cash and trade credits at prices
established by the selling company and its suppliers. Thus,
the utilization of the trade credit creates cash savings and
real economic value from amounts that would otherwise
have been spent. No media or other service order is ever
placed without the selling company and its advertising
agency’s approval (in the case of advertising) and, as a result,
the services purchased meet all of the selling company’s
specifications.
Active charges no fees or commissions and, in the case of
media, Active bills the media net of an advertising agency
standard commission up to 15% so as not to interfere
with the selling company/advertising agency relationship.
Further, Active provides full proof of performance so the
selling company can easily ascertain that what was ordered
was, in fact, delivered. With respect to non-media goods
and services, the process works similarly.
Accounting and Financial Statement Treatment
Authoritative accounting guidance for corporate trading
or barter for is generally set forth in International Financial
Reporting Standards (IAS16, IAS18, IAS38, IAS40, IFRIC18 and
SIC-31).
Under IAS18 12, “When goods are sold or services are
rendered in exchange for dissimilar goods or services, the
exchange is regarded as a transaction which generates
revenue. The revenue is measured at the fair market value
of the goods or services received, adjusted by the amount
of any cash or cash equivalents transferred. When the fair
market value of the goods or services received cannot
be measured reliably, the revenue is measured at the fair
market value of the goods or services given up, adjusted by
the amount of any cash or cash equivalents transferred.” In
a corporate trade transaction, since services associated with
a trade credit have not yet been rendered utilizing the trade
credits exchanged, revenue is not recognized and such
amount is reflected as a prepaid asset.
Thus, corporate trade transactions under IFRS involving
exchanges of assets for a trade credit have commercial
substance and are generally measured at the fair market
value of assets exchanged unless the fair market value of
the trade credit is more clearly evident. Fair market value
is “the amount for which an asset could be exchanged or
liability settled between knowledgeable, willing parties in an
arm’s length transaction.” IFRS13 similarly defines fair market
value as “the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between
market participants at the measurement date.”
may vary. Accordingly, interested parties should consult
with their respective accounting advisors to determine the
appropriateness of the suggested accounting treatment.
The example which follows illustrates a typical arrangement
relative to the points described above. Other structures
and arrangements may exist in practice which the trading
company could design to meet a specific client’s objective.
To properly account for a corporate trade transaction
involving the exchange of an asset for trade credits, the
entity would measure the transaction at fair market value.
Since the asset traded for the corporate trading company’s
trade credit provides an economic opportunity for the
company to realize increased economic value in the form
of cash savings as the trade credit is used, commercial
substance exists. Accordingly, the trade credits received are
reflected at the fair market value of the traded asset as a
prepaid marketing asset as the consideration given up by
the seller (the asset traded) may be more reliably measured.
The prepaid marketing amount would be amortized as the
trade credit is used. Alternatively, if the fair market value of
the trade credits received can be more reliably measured,
meaning their value is assured, then under IFRS, a gain
would be recognized assuming the trade credit fair market
value was greater than the fair market value of the asset
exchanged and related carrying amount.
Examples, Facts and Assumptions
Assume that a company sells an underperforming asset
to the trading company with a carrying or book value of
€1,000,000 and a market value of €300,000 for €1,000,000
in trade credits which are used over three years (assumed
contract term) at an 80:20 (cash:trade credit) ratio or blend.
In this case, €5,000,000 of cumulative purchases of media,
travel, printing or other goods and services would fully utilize
the trade credits.
Under accounting standards generally accepted in the United
States, Financial Accounting Standards Board, Accounting
Standards Codification Topic 845 specifically provides that,
in reporting the exchange of a non-monetary asset for
barter or trade credits, it is presumed that the fair market
value of the non-monetary asset exchanged (receivables,
inventory, capital equipment, real estate or leases) is more
clearly evident than the fair market value of the barter or
trade credits received, unless the entity can demonstrate that
there is a history of converting barter credits into cash after
receipt, in which case, the transaction would be measured
at the fair market value of the trade credits received.
The barter or trade credits should generally be reported
at the fair market value of the asset exchanged. It should
also be presumed that the fair market value of the nonmonetary asset does not exceed its carrying amount unless
there is persuasive evidence supporting the higher value and
utilization of the trade credit.
Generally, until used, the barter or trade credits are carried as
a prepaid expense on the company’s balance sheet. In effect,
until the trade credit is used, the traded asset is reclassified
from inventory to prepaid expense at its fair market value,
up to its historical carrying value, after determining the
reasonable assurance level of whether the trade credits will
be utilized.
Any impairment on the barter or trade credits should be
recognized if (1) it subsequently becomes apparent that the
fair market value of any remaining trade credits is less than
the carrying amount or (2) it is probable that the enterprise
will not use all of the remaining barter credits.
Since the determination of fair market value may, depending
on the nature of the assets to be traded, be somewhat
subjective in nature in assessing fair market values, the
accounting treatment of a corporate trading transaction
Further assume that the company has annual media
expenditures totaling over €10,000,000 and, for simplicity
purposes, the trade credits are utilized equally over the three
years against future media purchases.
From the seller company’s perspective, the benefits of the
transaction are to create value through cash savings that
otherwise would be lost if an immediate liquidation strategy
was followed for this asset. As noted below, €700,000 of net
economic value is created.
The Economic Benefits of the Transaction
(Figure 1)
Cost of Goods and Other Services
Acquired at Benchmark Prices
€
5,000,000
€
4,000,000
Consideration Given Up for Goods
and Other Services Acquired:
Cash Component
Fair Market Value of Inventory
300,000
Total Consideration
Value and Cash Savings Created
4,300,000
€
700,000
Under IFRS, the asset traded is generally reflected prior to
the exchange at the lower of cost or net realizable value
(for inventories) or fair market value (other assets) and the
economic benefit of the trade credit will be realized as
the trade credit is utilized. Accordingly, a prepaid expense
would be recognized at the outset of the transaction at the
fair market value of the asset exchanged. If this asset was
carried at a value greater than fair market value, then the
asset would be written down to fair market value.
Situation # 1
Assuming the company has no experience with trade credits
and the inventory in question would be adjusted to its net
realizable value of €300,000. Inventory would be sold to the
corporate trade company for €1,000,000 in trade credits and
a prepaid expense for €300,000 would be reflected by the
selling company. The financial impact of these assumptions
is summarized below.
Financial Impact of Trade (In €1,000s)
(Figure 2)­
At Contract
signing Date
Year 1
Year 2
Year 3
Cumulative
Totaals
Cash
Outlay
N/A
€1,333
€1,333
€1,334
€4,000
Prepaid
Expense
Amortization
Change
N/A
€100
€100
€100
€300
€300
€200
€100
N/A
N/A
Balance
Sheet
Prepaid
Expense
Account
Situation # 2
If trade credit utilization were assured, the accounting for
the non-monetary transaction would be different than as
summarized above.
At the outset of the transaction, the company would recognize
a prepaid marketing asset in the amount of €1,000,000 and
relieve its inventory account by a like amount as trade credit
utilization is assured and the economic benefit of the trade
credits received is more reliably measured (assuming lower
of cost or market for inventory was €1,000,000). Effectively,
the company has exchanged its underperforming asset
to pay for future media. If the asset, on the other hand,
was carried at a fair market value of €300,000 prior to the
corporate trade transaction, then on the exchange the
company would recognize a gain of €700,000 assuming
trade credit utilization was assured. The figure below
summarizes the financial aspect of the corporate trade
transaction over a three-year contract period.
­­
Financial
Impact of Trade (In $1,000s)
(Figure 3)
At Contract
signing Date
Year 1
Year 2
Year 3
Cumulative
Totaals
Cash
Outlay
N/A
€1,333
€1,333
€1,334
€4,000
Prepaid
Expense
Amortization
Change
N/A
€333
€333
€334
€1,000
€1,000
€667
€334
N/A
N/A
Balance
Sheet
Prepaid
Expense
Account
As noted above, any subsequent impairment of the barter
or trade credits should be recognized if it subsequently
becomes apparent that the entity will probably not use the
remaining trade credits and that the related fair market value
is less than the carrying value.
Intracompany Trade Credit Utilization
Some companies reflect the acquisition of trade credits
(prepaid marketing) as a corporate asset. As the trade credits
are utilized by other operating divisions, the marketing
expense incurred by those divisions may be at the amount
that would otherwise have been incurred on a 100% cash
basis, i.e., the benefit of the utilization of the trade credit is
reflected at the corporate level, not at the operating level.
In this manner, control over operating budgets may be
maintained, but the operating unit may not be sufficiently
motivated to utilize the trade credit as it does not realize any
trade credit utilization benefit.
Accordingly, to properly motivate those divisions who may
positively accelerate trade credit utilization as well as realize
the full value of the trade credits, the trade credits’ economic
benefit should be shared with the operating division
which utilizes the trade credits. Planned expenditures, as
documented in corporate and operating divisional budgets,
should reflect the planned utilization of trade credits in order
to maintain budgetary control over the related expenditures
and trade credits to be utilized. In this manner, when actual
expenditures are compared to planned expenditures, the
operating unit realizes a portion of the economic benefit of
the trade credits as the trade credits are utilized, while at the
same time, budgetary control over the related expenditures
is maintained and the operating unit is appropriately
motivated.
Conclusion
Corporate trading creates value and is easily applied. This
financial strategy will recover substantially greater economic
benefit of excess or underperforming assets rather than
the 30%-40% typically achieved through liquidation. Key
considerations at the outset of a transaction are:
■■ Can trade credits be used easily?
■■ Are you satisfied with the scale and depth of services
of the trading company and does the trading company
have a successful track record of retiring trade credits
for clients?
■■ Is proof-of-performance accompanied by affidavits
and post-buy analysis in the case of media routinely
provided?
■■ Does the trading company possess the ability to provide
complete, professional, in-house media staff with
agency-trained buyers who have sufficient experience?
■■ Are the purchases of goods and services at the same
quality and at the same price that would otherwise be
purchased?
■■ Are sufficient and appropriate fulfillment inventories
or capacities maintained to satisfy anticipated client
needs?
■■ Does the trading company maintain a demonstrated
ability to re-market merchandise, real estate
and capital goods to specified end-users exist?
For More information, Please contact:
Gary M. Steinbeck
Executive Vice President
Chief Financial Officer
Active International
Tel: (845) 732-8660
Fax: (845) 735-1774
[email protected]
I N T E R N A T I O N A L
CREATING VALUE WITH EVERY TRADE
ONE BLUE HILL PLAZA, PEARL RIVER, NY 10965
T: 845.735.1700 | F: 845.735.1938 | activeinternational.com
05.27.15
Budapest | Düsseldorf | London | Madrid | Melbourne | Mexico City | New York | Paris | Sao Paulo | Seoul | Shanghai | Sydney | Tokyo | Toronto | Warsaw